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and knowledgeable decision. However, it has been charged that one of the major purposes of such statutes is to protect entrenched management. The mechanism for such an abuse lies in the hearing on fairness to be held by the state's securities commissioner. Such hearings are frequently protracted and, in most cases, occur before a politically appointed officer who has no love for the out of state officer.10 In April of 1976, after careful study, Delaware adopted such a law as new Section 2031 of the General Corporation Law. The official comment accompanying the bill outlines its basic terms and aims:
During the past several years a number of public offers to purchase shares of stock in a corporation have been made upon such short notice that the shareholders have not been given ample opportunity to determine if the offer is fair, or to see if some more favorable offer might be made in the auction of an open market. Even management in some instances has not had time to evaluate the fairness of the offer and to determine whether to recommend it to its shareholders, to oppose it, or to take no position. The statute here proposed would require any such offeror to give notice to the corporation of the basic terms of a proposed offer 20 days before it is to open and to keep the offer open for a minimum of 20 days. By providing this minimum period of 40 days, the shareholders will have time to evaluate the offer, and the market place will have an opportunity to react to the
offer." Thus, Delaware neither permits the "Saturday Night Special," 112 which favors the underpriced raid, nor does Delaware go to the other extreme and grant management a friendly forum in which to seek to avoid a fair competitive offer for the stockholders' shares.
V. REMEDIES Delaware offers corporations and stockholders a specialized forum and procedures for the prompt enforcement of their rights. Article IV of the Delaware Constitution of 1897 and Chapter 3 of Title 10, Del.O.Ann., establishes the Delaware Court of Chancery as the separate equity court, with jurisdiction to oversee operations of Delaware corporations and to enforce the General Corporation Law. The court's work gives its judges the experience necessary for informed application of equitable and corporation law principles.
The men who have served as Chancellors and Vice Chancellors have had, almost uniformly, distinguished records of public service. The judges' decisions, cited and quoted above, show their enlightened concern for intra-corporate justice.
Delaware law provides a number of situations where the Court of Chancery is specifically empowered to direct that particular steps be taken to protect stockholder interests. Some of these situations have been discussed previously."
100 Such provisions for hearings exist in Hawall, Idaho, Indlana, Kansas, Minnesota, Ohlo. Pennsylvania, South Dakota, Virginia, and Wisconsin'; prior to 1976, only Colorado and Nevada did not provide for such a hearing.
110 8 Del. o. | 203. etective May 1, 1976.
113 Among attorneys the shortest offers are drawing the most fire. Despite some recent successes, pressure is building for change. "Called Saturday Night Specials, quickies, or blitzkriegs, these offers run no more than eleven days—including weekends and are designed to take the hostile target by surprise, panic the shareholders into selling, and just barely meet the Williams Act's seven-day minimum time period." Fitzhugh, John, Cash Tender Offers: Rage and Outrage"; SEC 1976 ; at page 165, Law Journal Press.
113 Professor Cary attacked Delaware judges generally in an unfortunate ad hominem passage. Cary, Federalism Article, at 690-696. The cases cited in the earlier portion of this review seem to us, & better defense to Cary's charges than engaging in the same notoriously dangerous "social Jurisprudence"; that is, trying to predict a judge's vote from his personal history. Cary's “history". Itself, is superficial; many of the Delaware judges having come from the rural part of the State, e.g., Vice Chancellor Brown and Justice McNellly; others have risen primarily through extensive service on the courts. not private practice, e.g., Chief Justice Herrman, Justice Duffy and Chancellor Quilen.
114 8 Del. C. $ 211, "Meetings of Stockholders", supra at pages 1-3 ; see also Ch. Ct. R. 81 which sets out the procedures for a corporate election held by court order and allows punishment of recalcitrant directors for contempt of court; 8 Del. o. $ 220, “Stockholder's Right of Inspection", supra at pages 5-10; 8 Del, O.' $ 225, "Contested Election of Directors: Proceedings to Determine Validity". supra at page 4; 8 Del, C. $ 262, "Payment for Stock or Membership of Person Objecting to Merger or Consolidation" (appraisal), supra at pages 27-32.
Other examples of similar significance can be cited.115 Considered together, however, these statutory remedies are only a part of those available to litigant stockholders.
A stockholder can bring suit in Chancery to enforce individual, class derivative claim 17 arising under the corporation law. Such suits may seek money damages, or preliminary and permanent injunctive relief, 110 as well as specific performance of statutory or contractual obligations 121 or such other relief as the court finds appropriate. Whatever the relief sought, stockholders' suits receive prompt attention from a judge whose docket is not overly cluttered. 122
Sequestration of the defendants' assets provides a unique mechanism to make most defendant directors and officers subject to suit by stockholders in the Court of Chancery. Although they may live and work outside Delaware, if the defendant holds stock in any Delaware corporation, such stock is subject to sequestration at the court's order to compel appearance in answer to a stockholder complaint.123
However, the existence of judicial stockholder litigation machinery does not necessarily assure the protection of minority rights. Rules can be burdensome or expensive. Delaware, unlike some states, does not discourage stockholder litigation by requiring a substantial bond for costs. The rules with respect to pleading and prosecuting class and derivative actions are modeled on the federal rules for maintaining such actions and contain no unusual inhibitions or restrictions. With respect to the requirement that a derivative plaintiff make a prior demand upon the board or fellow shareholders to bring suit, the Delaware rule is so liberal as to make that requirement a virtual nullity."
Compromise or dismissal of stockholder derivative or class litigation is rigidly controlled by the court in order to insure that the non-participating minority is protected. Notice provisions are, if anything, more rigorous than under the federal rules.
The court's role in passing upon proposed compromise of stockholder actions has always been more than cursory. Where an objection is made, the objecting stockholder or class member has a right to reasonable discovery and may conduct an evidentiary hearing with respect to the fairness of the settlement. Proposed settlements in stockholder litigation have been disallowed because of inadequate protection of corporate or minority interests. 125 Even where the objection has been denied, the proceeding or review has resulted in an improvement of the deal for the benefit of minority shareholders. Manacher v, Reynolds 136 for example, an appeal to the Delaware Supreme Court from a Chancery decision that a settlement was fair, was compromised by substantial improvement in the terms of the settlement.
Nor has the Court of Chancery been reluctant to award substantial counsel fees, where plaintiffs have been successful in achieving meaningful benefits for
1158 Del. C. 168. "Judicial Proceedings to Compel Issuance of New Certificate" ; 8 Del. c. 223, "Vacancies and Newly Created Directorships";
8 Del. c. I 226, “Appoint ment of Custodian or Receiver of Corporation on Deadlock or for Other Cause"; see also Ch. Ct. R. 30 : 8 Del. 0. $ 278, "Continuation of Corporation After Dissolution for Purposes of Sult and Winding up Afalrs"; 8 Del. C. $ 283, "Revocation or Forfeiture of Charter Proceedings",
114 Ch. Ct R. 23, "Class Actions".
supra note 50 (derivative action to require corporate employee to account to the corporation for profits realized from insider trading),
118 E.g., Gimbel v. Signal Cos. Inc., 316 A.20 599 (Del. Ch. 1974), supra note 44 (class action by minority stockholder to enjoin sale of stock in wholly owned subsidiary).
120 E..., Western Airlines, Inc. v. Allegheny Airlines, Inc., 313 A.24 145 (Del. Ch. 1973) (to com pel performance of contractual obligations by successor corporation pursuant to 8 Del. C. $ 259).
In E.E., Baron v. Allied Artists Pictures Corporation, 337 A.28 653 (Del. Ch. 1975) (to compel payment of dividends on preferred stock and return voting power to common stockholders).
129 Unlike most state and federal courts, the Delaware Court of Chancery remains strictly a court of equity. 10 Del. C. 341. Delaware's "law” court, the Superior Court. is charged with jurisdiction over such burgeoning areas of Iltigation as criminal, tort, and domestic relations cases. 10 Del. 0.8541. This makes the Court of Chancery expert in the traditional areas of equity such as trusts, estates and fiduciary relations as well
123 The Delaware Sequestration Statute, 10 Del. O. & 366, was recently upheld by the Delaware Supreme Court against a constitutional attack raised by defendant directors. The Greyhound Corporation v. Heitner, C.A. No. 132, 1975 (Del. Supr., filed April 15. 1976).
124 Mintz v. Bohen, 210 A.2d 509 (Del. Ch. 1965).
the minority shareholders or the corporation by judgment or by compromise. Such awards provide real incentive to minority shareholders and their attorneys to challenge questionable corporate transaction.
Stockholders do, in fact take advantage of such remedies. In 1973 through 1975, 897 actions were filed with the Court in New Castle County. Of those, close to one-third (258) were corporate matters; 63 of which were filed derivatively. Furthermore, 73 sequestration orders were entered by the Court to compel appearances hy non-resident defendants. In corporate and other matters, Chancery issued 90 orders granting interlocutory injunctive relief.128
VI. CONCLUSION We have sought to set out, by illustration from existing cases, statutes and other authorities, the substantial principles underlying Delaware Corporation Law as well as the procedures available for their enforcement.
We will have achieved our purpose if the result is a greater understanding in the reader of these significant features of the law.
Senator HARTKE. Our next witness is Mr. Ralph Nader. Who do you have with you?
STATEMENT OF RALPH NADER, CORPORATE ACCOUNTABILITY
RESEARCH GROUP; ACCOMPANIED BY MARK GREEN; AND JOEL SELIGMAN
Mr. NADER. Thank you, Mr. Chairman.
With me is Mark Green and Joel Seligman, who are coauthors with me of the report constitutionalizing the corporation, a case for Federal chartering of giant corporations.
Thank you for the opportunity to testify this morning on a subject of this hearing and this committee which will, hopefully, initiate the greatest public debate on the role of the giant corporation in American history. This is going to be a lengthy and arduous discussion. There will undoubtedly be numerous days of hearings and deliberations in both Houses of the Congress; and I know no one who has more stamina to conduct such hearings than the present chairman of this hearing today.
I thank you for that interest in this subject.
As you know so well, prior hearings of the Senate Commerce Committee as well as other hearings of other congressional hearings in the last 10 years have documented a wide array of the most serious abuses of corporate power in categories, economic, health, and safety, and in categories political, multinational, and credit.
These abuses need to be viewed in the form of a comprehensive approach to corporate reform. No longer can we expect that each pattern of disclosure can generate its own deterrent power which leads to corrective action. Indeed, that expectation a decade ago was highly speculative to begin with. In the light of a decade's experience, it is quite clear that corporations are invulnerable to what was once considered significant deterrent forces; namely, disclosure, congressional admonition, Government law enforcement, in part because of inadequate resources and in part because of the growing controls corporations have over governmental processes, which are no longer ad hoc and no longer episodic, but reflect a pattern of institutionalized control, bridging both the corporate and political spheres.
127 Those who may conclude that, on some statistical basis, the rulings of the Delaware Courts more often favor management than complaining stockholders overlook the fact that defendant management is likely to take to final judgment only those cases in which they believe their position to be strong. Cases in which the exposure to llability is great, or even slightly more than marginal, are frequently resolved by compromise, which results are generally never reflected in reported decisions.
196 These figures and others reflecting the Court's docket are informally maintained pursuant to direction of the Chancellor by the law clerks of the Court of Chancery.
Our proposal for Federal chartering of giant corporations is based on two principal foundations: A jurisdictional one and a foundation of justice. Jurisdictionally, there is no argument that can be made that the legal appraisal and conditioning of corporate charters of giant multinational corporations should remain the fiefdom of the State of Delaware or any other single State because of the power of such split jurisdiction to achieve the lowest common denominator status among the States; and, in effect, permit corporations to shop around for appropriate chartering forums, playing off one State against another.
These are the United States of America, national charters for national and multinational corporations.
The chartering mechanism itself is grossly misunderstood. It is misunderstood by the lawyers in Delaware, the lawyers in Wall Street. It is misunderstood by economists who presume to be lawyers; it is misunderstood by people who are quick to stereotype and distort what is being recommended.
Let us go back to the origins of the Anglo common law. The common law developed on the basis of empirical recognition of victimization of innocent people. It received its impulses and its creation and its elaboration in a step-by-step recognition of injury to citizens, injury in tort or injury in contract. It did not require at that time a regulatory posture. The common law began to be supplanted in the United States more and more by statute and by regulatory standards. It is important to recognize the difference between these kinds of legal controls. For the last century, this country has relied very heavily on presumed regulatory control and the establishment of legal standards which economic institutions are supposed to adhere to under penalty of sanction.
The common law approach is one which develops out of recognition of the victimized process and gives citizens the rights and remedies to pursue along with the State, along with the Government, to pursue the citizen's objective in obtaining compensation for damages or other remedies.
Our proposal for Federal chartering recognizes that there needs to be a broad and deep expansion of initiatory rights and remedies by citizens as they are aggrieved or abused in the course of coercive receipt of corporate action. Many of the examples which we adduce in our report reflect coercive corporate impacts, nonconsensual corporate impacts on a number of citizen constituencies which we conveniently categorize as shareholders, consumers, workers, taxpayers, and community residents.
Small business can also be added to that list.
Historically, our law has proceeded in the common law area, from a recognition of coercive or nonconsensual impacts. You will note that much of the discussion criticizing the Federal chartering proposal displays an extraordinary insensitivity to the status of economic, health and safety victimization by people in this country. There's almost no reference to the broad range of destructive violence that we too charitably call pollution; the coercive impact of predatory practices; of the ability to bludgeon workers into obedience; on the looting of shareholders; on making the shareholders' theoretical right to control a corporation a disgrace in practice; on the control of the politics of local communities and cities, on the looting of taxpayers through both direct and indirect subsidies from the Federal Government without any kind of adequate control, monitoring or reevaluation; the tax expenditures, a bypass of the congressional process; the Penn Central type subsidy is a classical example of slush funds of money moving with little quid pro quo in terms of fundamental change on the part of the recipient corporation.
The Lockheed bailout is an example of deception while the public attention was focused on the $200 million loan guarantee, the Pentagon had permitted Lockheed hundreds of millions of dollars in distorted and inflated contractual bonanzas.
Specifically now, the question is raised about the Federal charter being a procedural device. Any lawyer who tells you that without defining what he means by procedure is engaging in a bad Socratic play. Our most important substantive rights, historically, have been transformed into procedural rights; the right against self-incrimination is usually considered a procedural device.
There is nothing new about procedural devices to attain substantive justice. It is a false distinction and need not detain us any longer in this discussion.
The framework of the Federal charter proposal is part and parcel of a worldwide reappraisal of corporate power. In Europe, the projection is in the direction of co-determination with labor achieving a larger role on the board of directors. The West German experience with co-determination is about 20 years old. It has not worked very well at all. It is basically a change without a difference.
In Scandanavia now there are even greater efforts to make co-determination more meaningful. One recently defeated bill would have given labor actually a majority vote on the board of directors.
We do not think that that is the preferred way to go in this country. We do not think that a merger of corporate and union forces can produce the necessary decentralization and flow of power to attain a just and prosperous society. We do recognize, however, that labor must be given more rights over the workplace, dealing with occupational health and safety, dealing with the license to abandon the community by the multinational corporation without any justification whatsoever; dealing with such matters as affect workers directly.
In our proposal we recognize that corporations now are not what they used to be. This is a fundamental basis of our recommendations. Economically, corporations are much larger. There are some observers who say that size itself makes no difference. These observers are usually relegated to academic groves in south Florida. They are not, certainly, reflective of what any retired businessman or active businessman would ever relate to an inquirer.
There clearly is a difference between a garage repairing cars in St. Louis, Mo., and General Motors. There clearly is a difference between a local pharmacy and Merck, Sharpe, & Dome.